Posted by: Josh Lehner | July 28, 2020

COVID-19 and Oregon’s Housing Outlook

This morning I am presenting a mid-year forecast for the Home Builders Association of Metropolitan Portland. A summary of my thoughts and a copy of my slides are below.

Due to the severe recession and pandemic, our office’s initial expectations were for housing and construction to see significant declines. Normally in a recession household formation weakens and incomes sag. However to date that has not happened. Housing has been stronger than most sectors overall. I think there are three main reasons for this strength in housing demand.

First is the nature of the cycle. If we’re being honest, it is clear that low-wage workers have borne the brunt of the pandemic and recession to date. High-wage and higher income households have fared better, and are predominantly homeowners.

Second are interest rates. Mortgage rates remain at or near historic lows. This keeps affordability issues at bay, and allows buyers’ budgets to expand. The outlook calls for low interest rates for years to come. The Federal Reserve is signalling they will not raise interest rates until the the economy is strong and actual inflation picks up.

Third is the big demographic tailwind for housing. In the decade ahead, Millennials will fully age into their 30s and 40s which are prime home-buying years. By one’s mid-30s in Oregon today we see a 50-50 split between owners and renters. Early 30s are a key cohort for first-time buyers, while early 40s are a key cohort for overall spending on housing (move-up buyers, young families furnishing homes, etc).

Now, while these strengths may be more structural in nature, uncertainty and risks remain.

The biggest risk remains the pandemic itself. There is no trade off between public health and the economy. It is not either/or. It is neither or both. And right now the worsening health situation increases the possibility of more permanent economic damage, a slower recovery, or even a double-dip recession.

As the recovery drags on — it may feel like years already, but we are actually only a few months into this cycle — it will likely weigh on household incomes and confidence. Some of the normal recessionary dynamics are likely to emerge. This will push back on those reasons for strength and optimism a bit.

Finally a wild card is working from home. There is a lot of speculation about how we will permanently alter our lives due to the pandemic. However it is much too soon to tell how it will shake out. It is possible that Oregon does see COVID-related migration, although unlikely to fully neutralize the cyclical swings this year or next. And household preferences may increase for single family homes, or larger homes, or ones with offices so they are better able to telecommute. To the extent any of that occurs, it would increase industry demand.

All told housing and construction are likely to be economic strengths in the years ahead. Housing is historically a leading economic indicator. Now, that doesn’t meant the industry isn’t impacted. Expectations should be for a couple soft years instead of large declines. The reason is those structural factors should be strong enough to offset some of the cyclical weaknesses.

As we touched on the other day, broadband and access to technology is increasingly important for social, economic, and education connections. We know the pandemic is impacting education considerably, and many schools will have increased distance learning this fall, if not entirely so. In a recent presentation a question arose about digging into the data further on kids with and without broadband at home. This edition of the Graph Table of the Week does just that for the Portland tri-county area.

We know there are inequities regarding broadband and technology more broadly. When it comes to households with kids at home these inequities break down along two main dimensions: economic, and racial and ethnic. A larger share of lower-income household do not have high speed internet at home. And households headed by Black, Indigenous, and People of Color are less likely to have high speed internet at home compared with their white, non-Hispanic neighbors. This is at least among low- and middle-income households. Households with incomes above $100,000 a year tend to have similar rates of high speed internet at home regardless of race or ethnicity.

A few notes and caveats with the data.

The breakdowns by race and ethnicity are based on the characteristics of the householder (formerly called the head of household, but is really about the adult who fills out the Census questions). As such it does not necessarily reflect how the kids identify, but is the best I can do relatively quickly.

There are sample size concerns, particularly as you slice the data to finer and finer levels. We know the Portland region is not especially diverse, so focusing on some racial or ethnic groups stratified by income likely yields estimates with larger margins of error. So take the particular percentages with a grain of salt, even as the overall patterns are likely correct.

Finally, one item that stood out to me with the standard Census tables on this subject is the impact of cellular only broadband connections. Statewide it was about 10% of households. I don’t know about you but I am both amazed and frustrated at my phone. I can do nearly everything I want on my phone, but at the same time the things I can’t do get me frustrated at times. As such, in the table above I only crunched numbers for high speed internet (cable modem, fiber optic, or DSL) as doing homework on a phone is likely less than ideal. Now, among Portland area households with kids, there are 12% that do not have high speed internet but do have cellular, bringing the percentage with neither down to almost zero (0.3%). Whether that is good enough I don’t know, even as we would expect it is not optimal for learning this fall.

Posted by: Josh Lehner | July 22, 2020

Working from Home and Broadband Access in Oregon

There is considerable speculation about how the pandemic will change the way we live. In particular our office is fielding a lot of questions about working from home and whether households may increasingly choose to live in the suburbs or rural areas as a result.

Solid data on 2020 migration patterns is a long way away. And early indications based on Zillow home searches show Americans are not increasingly looking toward the suburbs. However, time will tell to what extent we do alter our lives as a result of the pandemic.

With that in mind, our office has pulled together and updated some of our previous research on working from home and broadband access here in Oregon.

It is important to keep in mind that to the extent working from home represents a long-run growth opportunity, and it does, many of these changes tend to be incremental. Yes, there is a spike in working from home due to the pandemic. However, when it is safe to do so, most workers will likely be recalled to the office. Permanent massive, wholesale changes to they way we work are unlikely. That said, even incremental changes and evolutions can matter for regional economies, workforce needs, commercial real estate, and the like.

I want to highlight three main findings.

First, the reason we care from a big picture perspective relates to Oregon’s long-run outlook. One of our comparative advantages remains the state’s ability to attract and retain talent. To the extent that Oregon sees any sort of bump in COVID-related migration, that’s beneficial to the long-run outlook.

Second, within the state the folks working from home are diversifying our regional economies. Outside of the Portland area, those working from home tend to be concentrated in occupations that aren’t as prevalent locally as they are nationally. In essence these workers are voting with their feet, saying they want to live in our communities. However it is harder to find a job in their chosen field, so they are making it work by bringing their job with them, or starting their own business. This increase in economic diversification should make our regional economies more resilient and better able to withstand different types of recessions over time.

Third, broadband is a critical component for a number of reasons. On the economic side, having residents better connected to labor markets to search for jobs, and interact with co-workers and clients is important. It’s not just the availability of a broadband connection, but really about the speed, reliability and price of that connection. We know once you get outside of the major cities in the Willamette Valley, the speed and reliability can fall off, impacting potential growth opportunities.

However broadband access also matters considerably for social connections, and increasingly for education needs as students do more online learning due to the pandemic. We also know there a lot of inequities regarding access to technology. This goes for urban vs rural, young vs old, rich vs poor, and white vs Black. How all of those factors interact matters considerably for social, economic, and education connections in society.

Bottom Line: Oregon overall does better than much of the country when it comes to broadband access and working from home. There remains a lot of potential for future growth. However, expectations should be realistic. It is unlikely that we will see massive changes in where we live and how we work. Metropolitan areas still provide a lot of benefits, including thicker labor markets for future job opportunities. However, even ongoing incremental shifts matter and to the extent the economy continues to diversify, should pay long-run dividends for the state.

Download the slides here: Working from Home July 2020

 

Posted by: Josh Lehner | July 14, 2020

June 2020 Employment: More Good News

This morning our friends at the Oregon Employment Department released the June 2020 employment report. The data continues to show about as good of economic readings as one could hope for. Yes, the economy remains in a deep hole. However about 1 in 3 jobs lost earlier in the pandemic have now been regained. Similarly, the unemployment rate continues to fall and is about one-third of the way back down to where it was pre-COVID. This is all good news.

The key issue is trying to decipher what it means moving forward. Monthly data like employment, but also household income and consumer spending at the U.S. level, is traditionally the gold standard for high-quality, timely data. But given how fast events are moving, even monthly data may feel a bit backward looking today.

The reason I bring this up is that it is clear the economy continued to do better than expected a month ago, but whether that progress and the recovery continued at the same pace since then is a bit up the air. COVID cases are rising (and not just due to more testing) and some consumer indicators are leveling off in recent weeks. Keep in mind that this remains a public health crisis. There is no trade off between the economy and the virus. And then if we layer on the potential fiscal cliff impacts of federal assistance to firms and workers going away, it can be hard to know how much the June data really tells us about where the economy will be in a month, let alone the end of the year.

That said, I wanted to provide a few updates to some items our office is tracking. On the economic side of things, the key remains how much of the temporary pain we have experienced turns permanent. The more firms that close or the more laid off workers who aren’t recalled the slower, and harder the overall recovery will be.

The first chart is an update our of standard comparison of recessions in Oregon. The current cycle does not look like past recessions given the sudden nature stop of economic activity due to the pandemic.

The second chart really shows what is going on here. There are a handful of sectors that are most impacted by social distancing. They experienced larger job losses due to the pandemic, and as social distancing restrictions lifted in recent months, workers are being recalled. These sectors account for about 45% of employment overall, so their rebound really drive statewide gains. Most of the industries aren’t a surprise, although I would say construction is. I will have more thoughts on construction in a couple of weeks, but wanted to note it too is a rebounding sector in the past couple of months.

Now, all other industries in the state have seen sizable job losses and no real rebound as of June. I’m not trying to cherry pick the data here and have some gains and losses offset each other. When it comes to natural resources, manufacturing, government, transportation and warehousing, professional and business services and so forth, there really hasn’t been much rebound, if at all.

This distinction between the cyclical rebounds as social distancing lifted, and broader trends in other sectors of the economy is a key issue to watch moving forward. Does the rebound stall out as consumers pull back due to the pandemic? Do the other sectors start to grow again? Or does ongoing economic weakness spill over and these other industries start to see more layoffs in the near future?

Similarly a key distinction for the recovery is gauging the impact of temporarily laid off unemployed workers versus a more fundamental increase in unemployment due to permanent layoffs and businesses hiring less overall. The last chart today updates a new measure pioneered by Jed Kolko and discussed more in depth last month. A huge thank you to Tracy Morrissette over at the Oregon Employment Department for his great work digging into the detailed data so we can get this Oregon specific look.

In short what the core unemployment rate does is strip out those temporarily laid off from their jobs to get a better gauge of permanent damage. Here in Oregon we have seen the core rate rise around 1 percentage point, but hold steady the past couple of month. So far the data indicates the vast majority of the changes in the headline unemployment rate are due to temporary layoffs and some of those workers being recalled. The fact we are not, or at least not yet, seeing a big rise in the core unemployment rate is another good economic indicator.

Bottom Line: Oregon’s labor market looked to be as good as one could hope for in June. Growth is driven by workers being recalled to their jobs as social distancing restrictions lifted and the pandemic looked to be improving. However given the uptick in new COVID-19 cases, and the uncertainty surrounding federal aid to businesses and households, there remains considerable uncertainty surrounding the overall economic outlook.

Posted by: Josh Lehner | July 7, 2020

Where PPP is Helping Oregon the Most

The U.S. Small Business Administration just released detailed data on the actual Paycheck Protection Program (PPP) loans/grants across the country. Individual business information is now public for loans in excess of $150,000, while general characteristics (amount, zip code, industry) are available for loans of smaller sizes. What follows are a few quick high level cuts of the data to see which industries and regions of the state are getting relatively more, or less in small business assistance. Apologies for the death by bubble chart, but I will conclude with a few relevant thoughts after the graphs.

This first look shows PPP loans by county. The horizontal axis measures the share of local businesses that were approved for PPP loans. The vertical axis measures the dollar amount of those loans, relative to local wages. Now, we have imperfect data with some classification and coding issues, but think of these comparisons in broad strokes. Going left to right think of how many firms are being assisted somewhat by the program, and going up and down the relative size and impact on the local economy.

What stands out the most is that a larger share of local firms in places like Deschutes, Hood River, Jackson and Wallowa were approved for PPP loans. We don’t have a good local control for small vs large businesses here, so that may factor in to the higher percentages. In terms of dollar amounts and the potential economic impact, the data indicate very high shares in Grant, Harney, and Lake. In digging into the data a plurality of these PPP loans went to local health providers, raising the countywide figures. Excluding those specific loans, each county was close to the statewide average. On the lower side, Washington County sticks out a bit for the lower percentage of wages, which is most likely due to the presence of a couple large, multinational firms that account for a lot of economic activity and are ineligible for PPP. Additionally, what may also stand out is what’s not shown. PPP loans along the North Coast (Clatsop, Lincoln, Tillamook) are in that cluster of counties just to the right of the statewide average. Given the severity of the local recession on the North Coast, one may have expected to see more PPP loans.

This second chart is a very similar look but instead of counties, we’re looking at high level industries across the state. There is not a ton of variation in terms of the share of firms receiving PPP, but the dollar amounts do vary considerably. No real surprises here that leisure and hospitality and other services are receiving the most PPP loans, given these sectors were the tip of the spear of the recession and those most impacted by shelter in place style policies. They needed the most assistance, and got it. Whether it will be enough to truly weather the storm, only time will tell. Some of the sectors a bit lower down are going to be impacted by the presence of larger businesses, and not as reliant upon small businesses.

The final chart for today digs a bit deeper into the data and looks at more detailed sector information. Same style chart, but the sectors highlighted in dark blue are industries in which Oregon has a large local concentration relative to the nation. These industries are historical and current economic strengths for the state, even as they may not necessarily be the engines of growth moving forward.

Large parts of the timber and natural resource industry in Oregon were approved for PPP loans. On the other hand sectors like computer and electronic product manufacturing and metal manufacturing saw relatively lower dollar volumes in large part due to the presence of bigger firms that drive a lot of our statewide figures, although it certainly seems that the smaller firms in these industries did receive PPP loans.

Now, the one sector that stood out the most to me was Oregon’s beverage manufacturers. This sector is nearly twice as big locally as it is nationally. In breaking it down it appears that the state’s soda makers, breweries, wineries, and distilleries all received pretty similar numbers, at least in proportion to their size. Sure, a larger share of wineries received some assistance and breweries and distilleries saw a higher share of wages, but overall not a whole lot of differences there. PPP assistance for beverage firms did help some of those county numbers earlier. Places like Clatsop, Deschutes, Hood River, Lincoln, Polk, Wallowa, and Yamhill all saw larger volumes of PPP supporting their local beverage firms. I’ll cheers to that.

Looking forward it will be important to watch the different segments of this sector to help gauge the overall economy. The segments with grocery store distribution have done better recently. Consumers are buying what’s on the shelves. On the other hand, the segments more reliant on on-premise consumption and sales have struggled, to say the least. As discussed the other day, we are getting some mixed signals as to the rebound in restaurant activity and consumer confidence here in Oregon. The viability of the state’s food economy — at least the service portion — will depend upon just how strong that rebound is in the weeks ahead. And remember, that strength, or lack thereof is about public health and the virus. If people do not feel confident in venturing out then firms will struggle more.

A few concluding remarks:

Apparently this needs to be said given some of the online conversation. Don’t dox or knock firms who received PPP. The pandemic was outside of any firm’s control. If you take issue with PPP, address it on the policy side, not the firm side. Don’t try to shame a company for trying to use available programs to stay afloat during a crisis and keep workers employed. Those are things we need!

From an economic outlook perspective, PPP is only helpful to the extent that it keeps firms alive and helps prevent them from closing. So far we know it has helped tens of thousands of small Oregon businesses. The program likely is a key driver behind the stronger employment reports recently. Firms that received PPP said the loans would support more than 600,000 jobs in Oregon. That’s about 1 in 3 private sector jobs in the state. Overall this is to be celebrated.

But given that the program was originally designed to provide 8 weeks of assistance for small businesses, we know that help is now running out. Trying to tease out the relative impacts across regions or industries at the moment feels a bit like a lost cause because we’re still in the middle of the pandemic. The key question isn’t what happened a couple months back, it is what happens next? Will the economy experience another round of layoffs and firm closures or will companies receive further assistance to help tide them through the pandemic?

Posted by: Josh Lehner | July 1, 2020

Bar and Restaurant Demand (Graph of the Week)

Oregon’s economy has reopened. Pent-up demand turns the economy from recession into recovery. But a key question is just how strong is that pent-up demand? Does cabin fever and increased household savings outweigh the fears and uncertainties about the virus? In this edition of the Graph of the Week we see some competing data points here in Oregon.

First, video lottery sales are booming. Currently they are running about 90% of the sales levels seen a year ago, and considerably stronger than expected. Players have returned to their favorite bars and restaurants. However, the number of seated diners at Oregon restaurants who use OpenTable is running around 40% of year ago numbers. The number of people sitting down to eat remains considerably lower. Without trying to both-sides the data, this gap is fascinating. The differences will be important to watch in the weeks ahead as for what it means in terms of the virus, consumer behavior, and the economy.

In terms of bars and restaurants, the latest data on U.S. consumer spending showed that Americans spent 33% less on going out to eat in May 2020 compared to May 2019. Here in Oregon employment at bars and restaurants is down 45% over the same time period. There are some differences seen depending upon the type of establishment with limited-service restaurant employment down 31% and full-service restaurant employment down 59%. Some of differences in the chart above are likely tied to the types of establishment as well.

It’s important to keep in mind that even as consumer demand returns for our favorite bars and restaurants, it’s not easy for these businesses. Leisure and hospitality is among the most at-risk sectors due to the economic hit and the number of small businesses.

In terms of video lottery and gaming more broadly, I will follow up here in a few weeks when June financials are released around the country. Most everywhere was shut down in April and May, so June revenues will be an indication of pent-up demand for gaming elsewhere. In the meantime I think it may be worth quoting what we wrote in our forecast last month with a couple updates in brackets [ ].

As always, there are considerable risks to the outlook. On the upside, the level of pent-up demand for gaming may return sales to a higher level, faster than assumed. The state has seen a noticeable increase in scratch ticket sales in recent weeks [during the shutdown], as players seek out available gaming opportunities and entertainment. Additionally, even though most professional sports were put on hiatus, some players continued to wager on table tennis. When combined with the initial video lottery sales in Phase 1 reopening counties, this indicates that pent-up demand for gaming and entertainment more broadly is real. [Clearly we have seen this.]

However, downside risks certainty remain. This initial pent-up demand may reflect the one-time household recovery rebates or the extra $600 per week in expanded unemployment insurance payments. [Oregon kicker refunds as well] These are temporary and any impact will fade in the weeks ahead. But the real downside risks pertain to hesitant consumers only going out to their favorite bars and restaurants more gradually than assumed, or pull back further on discretionary spending like they did in the aftermath of the Great Recession.

At this point, the key question for the outlook is how will households behave going forward. Will these trends continue? Are households continuing to dip their toes in the water more and go out to eat little bit? Or given the potential fiscal cliff issues regarding federal assistance, and the growing number of cases, will household demand level off or retrench? These are the issues our office are monitoring and discussing with our advisors.

Here’s to everyone having a fun and healthy holiday weekend. Be kind. Wear a mask. That way all of us and the economy can learn to grow around the virus, and not shut down again.

Posted by: Josh Lehner | June 30, 2020

COVID-19 and Migration

In terms of the economy, the biggest risk is the amount of permanent damage that accumulates during the social distancing phase. Across the country this is largely about business closures and/or permanent layoffs. In terms of a more Oregon-specific risk, one item our office is watching closely is migration. While growth for growth’s sake is not necessarily a good policy goal, the real benefits of migration for Oregon isn’t just the increase in demand for local pizza shops, but rather the ample supply of mostly young, skilled workers for local businesses to hire and expand. Remember, long-run economic growth is all about the number of workers and how productive each worker is.

While people pack up and move to Oregon in good times and bad, we know most people follow the jobs. Migration flows are considerably larger when job opportunities are plentiful. As such, the recession is expected to change both the annual pattern of migration to Oregon but also the longer-term population forecast. Now, Oregon is still expected to see population growth, however these gains in the next few years are reduced from recent forecasts.

In thinking through the outlook it is helpful to distinguish between the expected impacts at different points along the way.

In the near term, migration is drastically reduced. Hardly anyone is moving during a pandemic and shelter in place style policies are in effect. Provided these policies lift and households are confident enough over the prime summer moving months, the impacts of the shutdown itself may prove minimal. The risk here is that the public health situation deteriorates such that nobody moves this summer, which is not our baseline forecast.

Over the medium term, migration will be reduced due to the recession. Fewer people will move here as job opportunities are harder to come by. Household formation will also be weaker due to income losses and uncertainty. Overall, our forecast for population growth over the next five years is lowered by 36,000 (-0.8%). What this effectively means, at least relative to our previous forecast, is that Oregon will basically lose one year of migration over the next five. Taking into consideration the typical age of migrants and labor force participation rates, this forecast change reduces the potential size of Oregon’s labor force by about 15,000 a few years down the road. In a stronger economy and given demographics, that’s roughly equivalent to 7 or 8 months of job growth. This is no minor change.

Now, over the long term our office does not expect any appreciable differences in the state’s ability to attract and retain working-age households. The combination of available jobs, scenic beauty, and housing affordability that’s bad, but also not the worst along the West Coast are all expected to remain.

Now, the reduced migration from the recession is expected to create persistent damage to the long-run outlook. However once the recession subsides, the damage is not expected to continue to mount or worsen. Migration flows in the second half of the decade are actually raised a few thousand relative to previous forecasts.

This lower population outlook has implications not just for labor force growth and different regions of the state, but also for things like the housing market which we will circle back on in the near future. Additionally, I have been fielding a lot of requests regarding remote workers and how the pandemic may change migration patterns. I am in the process of updating all that information and will share when it’s available.

For more on the population and demographic outlook, see our office’s forecast summary starting on PDF pg 30 here. It touches on fertility rates, age structures, how demographics can impact budgets, and expectations of an additional U.S. House of Representatives seat, among other things.

Posted by: Josh Lehner | June 24, 2020

How Strong is the Economy?

Last week we talked a little bit about the happy surprise of the May 2020 employment report. Jobs are up nationally and here in Oregon, while unemployment is down at the same time. Check out that post for a few more details and some new research trying to get at the temporary vs permanent impacts of the pandemic.

Today, I wanted to follow-up with the classic economist discussion of on the one hand, while on the other hand… Bear with me.

First, keep in mind that following things are all true. The economy remains in the deepest hole on record in Oregon. However the data is turning around in May and June. The technical recession is likely over, even as the economic pain will take some time to heal. And the economy, while still in bad shape, is doing noticeably better than expected, and our office’s forecast we released last month.

The hard thing to parse right now is whether that better-than-expected data truly represents a fundamentally better, or more resilient economy, or whether it represents a sort of false dawn. And then how do each of those possibilities change, or not, our thinking about the future.

For instance, we know that the big, and relatively quick federal response has an economic impact and helped put a floor under the initial fallout. The CARES Act provided a lot of much needed support for households, workers, and firms. We know household incomes are actually up in April due to the recovery rebates and expanded unemployment insurance benefits. Retail sales bounced off the bottom in May. This Friday we get personal income and total consumer spending data for May, which are likely to show healthy readings as well. In the chart below you can see our office’s forecast for Oregon personal income and how these federal assistance payments factor in.

Three things to note here. First, in terms of the impact on the state revenue forecast, what matters is that difference between our previous outlook and our current one. The outlook is lower due to the recession. Plus you need more nuance in the types of income here to get at the taxable part, but I digress.

Second, from an economic and household perspective, notice how incomes aren’t declining. Total income in the state is expected to be essentially flat this year and next. This, too, puts a floor under the impact on business sales, given households — at least in aggregate — are expected to have steady incomes. The increases in income in April and likely May are part of these annual figures above. As you can see in the next chart, these federal payments are considerably larger than anything seen in recent cycles. The CARES Act really does help bridge the short-term gap in recent months.

However the third thing is that these federal assistance programs are temporary. The recovery rebates were a one-time deal. The expanded unemployment insurance benefits expire in a month. And the Paycheck Protection Program loans/grants to small businesses are running out as I write.

That is the key question. Will more aid to households and firms be coming? Or will they go away as scheduled? Outside of getting clarity on the virus itself, this will likely determine whether the better-than-expected data does represent a fundamentally stronger economy, or a false dawn.

On the business side of things, economists are increasingly concerned about closures and permanent damage to the economy. This has been the primary focus of our presentations and discussions lately and I wanted to share a bit of that.

The point is running a business is hard. Even in good economic times about 1 in 10 Oregon companies close every year. And we are not currently in good economic times. The trouble is at least threefold. First, seeing record high unemployment is one thing, but it will be substantially worse if there are no firms leftover on the other side of the pandemic to hire workers back. Second, the economy has already been struggling with low rates of entrepreneurship and business formation. It will take years to regain the number of lost businesses. Third, firms build these incredibly complex webs, or networks when it comes to supply chains, professional services, training workers, in addition to intellectual products and the like. Losing a firm breaks all those relationships, compounding the problems and rebuilding the networks takes additional time as well.

One additional issue to watch today is the impact on small businesses. They do not have access to the same financial or capital markets as big companies. They do not issue stock or bonds and generally rely on current revenues and whatever wealth the owner has, often times his or her home equity. Given the typical small business has 1, maybe 2 months of liquid reserves, and the PPP loans/grants were designed to last 8 weeks, it means a sizable increase in firm failures is likely unless the economy proves much stronger than expected, or more assistance is provided in the weeks and months ahead. As Fed Chairman Powell has said, we’re really trying to avoid a liquidity problem turning into a solvency problem.

This final chart is designed to try and help scope some of these risks by sector here in Oregon. On the vertical axis you see a measure getting at a drop in consumer demand, based on our office’s employment forecasts for each industry. On the horizontal axis you see the share of jobs in that sector at small businesses. The thinking goes that the industries that see a larger, or more permanent drop in demand are more likely to result in firm closures, as are the sectors with more small businesses given they are more at risk than big businesses. Every individual firm is different, and their outlooks vary considerably, but this high level scatter plot does highlight some risks.

The final thing I will add is during our forecast presentation there was an important question about what state policy can do to help. A similar question is asked in pretty much every presentation I have given lately as well. And the answer is that this is really hard. Especially for state and local governments which have balanced budget requirements, unlike the federal government. Public revenues will never be enough to fill the need in the entire economy. So what do you do with limited resources?

Today we know that bars, restaurants, barbershops, nail salons and the like have been the most impacted by the pandemic and social distancing. They needed help months ago and still do. Even with the economy reopening, restaurant industry data suggest that while consumer demand has rebounded, it has started to flatten out, likely due to fears and uncertainty over the virus.

However, should the economy remain in bad shape for an extended period of time, there remains the looming specter that larger, regional anchor employers may be at risk. Keep in mind that these firms can really be anything from a company headquarters, to a hospital, to a university, to a distribution center, or a mill. Every local and regional economy is different, but they do have one or more anchor employers. And if those close, then it doesn’t really matter how much assistance you provide to the pizza parlor, because it will continue to struggle given the loss of jobs and income in the broader economy.

Balancing the needs of the firms struggling the most today, versus some unknown future risk, given limited resources is a really, really difficult thing to do. I don’t have an answer, but this is a key consideration I know policymakers are trying to deal with today and in the months ahead.

Bottom Line: The economic data indicates a severe recession, but growth has returned. The economy is doing noticeably better than expected. That said it remains to be seen whether there is another shoe yet to drop, particularly should federal assistance to households, workers, and firms expire as scheduled this summer. Until there is clarity on the public health side of things, the primary risk to the outlook remains the amount of permanent economic damage that accumulates during the social distancing phase of the cycle. Downside risks remain, even as we hope the stronger economic readings continue and the economy learns to grow around the virus.

Posted by: Josh Lehner | June 19, 2020

May 2020 Employment: A Happy Surprise

This week we got the May 2020 employment report for Oregon. Like the U.S., it was a happy surprise in that jobs grew and unemployment declined. Today I just wanted to highlight the data, update our charts, and introduce a new piece of research. Next week I will follow-up with more thoughts on how our office is working through the report’s implications and what it means.

First, the good news is that in May, Oregon added back about 1 out of every 12 jobs lost during earlier in the recession. The state remains in the deepest, or most severe recession on record, with employment data back to 1939. However those losses are no longer mounting based on the latest data. This truly is good economic news!

Now, this rebound in employment was a bit of a surprise and I’m of many minds right now trying to parse out what it means. On one hand this shouldn’t really be a surprise. High frequency economic data all point toward early May as being the worst of the recession, with things getting better since. At some point, economic growth does translate into net employment gains. The standard monthly data are all starting to bear this out with jobs up, unemployment down, industrial production and consumer spending rising, and the like.

Now, on the other hand, what was surprising was the good jobs report with the backdrop of initial claims for unemployment insurance continuing to come in higher than anything seen in past recessions. This is true even in the most recent few weeks.

The question is what happened? How much of this potential disconnect is about workers seeing hours reduced enough to claim UI but not being fully laid off? How much is due to the fiscal impact of the CARES Act? Are we waiting for another shoe to drop as the permanent damage mounts even as topline data improves? Or is the economy truly better, and proved much more resilient than expected? Were forecasters simply too pessimistic? I’ll have more thoughts on some of this next week regarding business and sector risks, and potential permanent damage.

But before then I wanted to introduce some new research I find very helpful to think through some of the current labor market data.

Indeed’s chief economist Jed Kolko pioneered a measure on Twitter the other week and recently wrote up his findings in The New York Times. The idea behind Jed’s work is to gauge the difference between permanent and temporary damage in the economy. We know most of the layoffs in recent months are/were expected to be temporary. In Oregon, when firms notify the state of layoffs, 86% of those layoffs are expected to be temporary. And if you look at the Oregon household survey data, about 75% of currently unemployed Oregonians are classified as on temporary layoff (the others are permanently laid off, or entrants into the labor market, or those who quit their jobs, etc).

As these workers are recalled to their jobs, we will see improvements in the topline data, which is great news overall. But it may also mask some darker, or more permanent changes seen in the economy. Jed’s calling his new measure the core unemployment rate and the calculation does two things. First it excludes all those unemployed on temporary layoff. Second he adds back in the marginally attached workers, or those who are not currently looking for a job but have looked for one in the past year.

The first part gets to the permanent layoff component and also those who are looking but can’t find work as firms aren’t hiring. The second part gets at any short-term participation rate issues where people stopped looking for work during the pandemic but otherwise may want a job. Keep in mind that discouraged workers are a subset of marginally attached workers, which is a bit broader by definition.

The chart above is an Oregon version of Jed’s core unemployment measure. Three things to note. First, a huge thank you to Tracy Morrissette over at the Employment Department for his great work digging into the details of the data that allowed me to recreate this. Second, the vast majority of the increase in the unemployment rate is expected to be temporary. Third, even so, the amount of permanent damage has increased, albeit relatively modestly so far. The core unemployment rate in Oregon has increased by just more than 1 percentage point, while the headline unemployment rate has increased by about 11 percentage points.

The key issue to watch moving forward will be how much or how little of the expected temporary economic pain turns permanent. Even under optimistic assumptions, it will take time to get back to full employment. There will be increases in firm closures and the number of long-term unemployed as a result of the recession. However, should the amount of permanent damage that accumulates be relatively small, then the recovery will be stronger and the economy will return to full health sooner. We will continue to monitor these changes in the months ahead.

Stay tuned next week for a few more thoughts on the data, the risks for businesses and sectors, and comparisons with our forecast.

Note: Economist Jason Furman has a somewhat similar concept, a measure he calls the full recall unemployment rate. It’s a bit more complicated of a calculation and is really designed to adjust for both the temporary layoffs, but also any real labor force participation rate issues. Here in Oregon our labor force participation rate is holding up. There is no indication in the data that workers are dropping out in vast numbers during the pandemic. But should that change, Jason’s work will be important to continue to track for Oregon.

Posted by: Josh Lehner | June 10, 2020

COVID-19: The Revenue Forecast in Context

Mark wanted to provide some additional insights into the revenue outlook. His thoughts are below.

The Revenue Forecast and Oregon’s Budget Gap

On December 12, 1980, Governor Vic Atiyeh issued Executive Order # EO-80-21, which created the Governor’s Council of Economic Advisors. The Council answered a need not only to improve the advice concerning future economic activity of the State of Oregon, but also to improve fiscal planning and revenue forecasting. The Council recently met with state decision makers to talk about the state budget gap and its impact on the economy.

Council members come from a range of academic and industry backgrounds, and hold a range of political ideologies. The Council’s main role is to advise our office on the quarterly economic and revenue forecast. It was with the reluctant blessing of the Council that the largest drop ever was put in the quarterly forecast the other week. Although the revenue outlook is a big piece of Oregon’s budget gap, it is far from the only one. Other key factors entered the discussion as well.

The Revenue Forecast  

The record drop in the June quarterly forecast was a reflection of the unique nature of this downturn. The sudden stop of economic activity made it immediately clear that Oregon was in recession, and that job losses would be severe. In the typical recession, it takes some time before the downturn is fully incorporated into the baseline outlook.

This time around, the damage was incorporated into the forecast all at once. Other than the timing, the change in revenue expectations is not unusual relative to past recessions. Over the 40 years that the Council has advised our forecasts, big recessionary declines have been the norm, with the notable exception of the early 1990’s. The stable forecast during the 1990’s recession was admittedly more a function of luck than foresight. Incomes and tax revenues did not decline in Oregon at that time–growth only slowed.

The chart below shows General Fund forecast errors over the past 40 years. The composition of the General Fund has been very stable over time, making comparisons possible. However, Oregon now relies significantly on other discretionary revenues such lottery sales and the new corporate activity tax, making the overall revenue hit larger than is reflected by General Fund changes alone.

How has the forecast performed? It depends on how you look at it. During the average two-year budget period, General Fund revenues have come in 1.3% higher than was expected when budgets were written. Not bad.

Unfortunately, it is rare that we actually experience something that looks like an average budget period. In practice, large forecast errors happen frequently. In roughly half of all budget periods, there is either a large revenue shortfall or a significant kicker payment issued. Over time, forecast errors on the downside and upside have offset each other, but can be very large in any given budget period. Our office depends heavily on the God of Offsetting Errors. Even in a year when the overall revenue forecast hits the mark, forecasts for some revenue components will be way too high, with others way too low.

If current expectations hold, the revenue decline for the current biennium will be something that policymakers have dealt with before. The June forecast calls for $1.5 billion less in General Fund revenue than was expected when the budget was drafted. The 2001-03 biennium saw a forecast drop of $2.3 billion in a General Fund less than half its current size.

That said, this historical forecast comparison does not fully capture the difficulty facing policymakers today. Timing has helped. The current biennium’s revenue outlook would have been revised downward even more if several months of it were not already in the books. In particular, income tax liability for the 2019 calendar year was already set before the downturn.

Also, the historical forecast comparison does not capture the strain on future budgets. We cannot estimate a budget gap until there is a budget, but know there will be fewer resources going forward. Relative to the last forecast, we now expect $3.5 billion less in General Fund revenue during the 2021-23 budget period, and over $4 billion less in overall discretionary revenues.

Unlike the federal government, Oregon and most other states must run a balanced budget. As a result, more revenue must be found or services must be cut. The Council’s discussion centered on best strategy to bridge the gap.

Falling tax revenues are only one component of the state budget gap. The expenditure side of the ledger and other funds and balances are equally important.

Balances and Reserves   

Before now, Oregon has never had the benefit of entering a downturn with a significant amount of reserve funds or balances. Automatic deposits into the Rainy Day Fund (out of corporate taxes and General Fund ending balances) and Educational Stability Fund (out of lottery sales) have added up over the decade-long economic expansion leaving us with sizable resources. If left untapped by the end of the biennium, the two reserve funds together are expected to reach $1.75 billion or 9% of the General Fund.

In addition to dedicated reserve funds, the Oregon budget also had a large expected ending balance heading into the recession. Due in part to the incomplete way the 2020 short session ended, the budget had more than a $1 billion cushion for the current biennium. Although the June revenue forecast erased this and then some, the budget gap is smaller because of it.

Although reserves are welcome, they alone will not be enough to bridge Oregon’s budget gap over the extended horizon. At request from Governor Brown, the Council discussed how to best deploy these reserves strategically over time balancing the dire need for public services today with the long-term nature of the expected revenue shortfall.

Federal and Other Funds   

Although most of the attention falls on the General Fund and Oregon’s other discretionary revenues, they represent a minority of the state’s resources. Oregon’s agencies collect a wide range of dedicated revenue streams that together account for almost twice the General Fund. Some of these revenue sources are already weakening due to the recession. For a look at the range of Other Fund revenues from fishing licenses, to PERS investment earnings, to gasoline taxes. See out office’s Other Funds Report for more information.

Federal funds are also larger than the General Fund, and are particularly important during recessions. State and local governments deliver the core services that distressed households and businesses require during downturns. With the ability to run deficits, the federal government can support these services when state policymakers cannot.

The CARES Act delivered a significant amount of aid to states, but much of it was restricted from being used to support core state services. Federal policymakers dedicated $1.6 billion to Oregon as part of the CARES Act to be used to support pandemic-related costs. Across the country, state and local governments have pushed for more flexibility in the use of these funds. Despite some success in these efforts, many core services remain unable to benefit.

There is a saying that state governments do only three things: Educate, Medicate and Incarcerate. There is an element of truth to this. Together, Education, Human Services and Public Safety account for 92% of Oregon’s General Fund expenditures. Federal support for core educational and healthcare services in the CARES act is only half as large as what was included in the American Recovery and Reinvestment Act of 2009, despite arguably more need today.

Expenditures   

There are two sides to the state budget–revenues and expenditures. While revenues drop during recessions, the need for a wide range of core public services rises. Caseloads for unemployment insurance, health services, housing support and many other programs will increase going forward. Agencies are currently drafting their budget requests for the upcoming biennium which will reflect the new reality. We will get a first look at how much need has risen when Governor Brown releases her recommended budget in the fall.

Much of the Council’s discussion with policymakers revolved around how to prioritize state programs in the current economic environment. Long-term investments in the economy were also discussed, as was the merit of tapping bond markets to backfill crucial programs in the way businesses secure working capital loans. Additional discussion sessions are in the works to help policymakers with the difficult choices ahead.

 

Older Posts »

Categories